Integrating E-Commerce into Exchanges: Risks and Rewards

Starting with public and consortia-based exchanges, the concept of a unified architecture for bringing together divergent applications for the benefits of many users private trading exchanges are generating the most significant and measurable results. Taking both sell-side and e-procurement applications and then incorporating them into a single many-to-many architecture, private trading exchanges are the future of web-based application deployment.

Clearly, the growth of all types of exchanges in the last 12–15 months is
hastening many mid-market and Global 2,500 companies to question the value of
these e-marketplaces, and to question which exchanges they should be involved
with. (For purposes of this article, the terms exchange and e-marketplace
will be used interchangeably.) There's an increasing focus on private trading
exchanges (PTX) because the metrics of these—most notably gross margin—can
quickly communicate the value of this type of e-marketplace. With the early
lead that public and consortia-based exchanges had during the last 18 months,
many companies today are questioning the sustainable value of using e-marketplaces
if the returns are not more immediate, and (at the very least) measurable. That's
why private trading exchanges have such a strong future—the benefit of using
them can be quantified over time.

With the focus being on exchanges and their evolution, it's important to realize
the progression this marketplace has experienced in an accelerated timeframe.
First, with the public exchanges, then to the consortia-based exchanges (CTX),
and now with the advent of the private trading exchanges (PTX), there is a progression
to profitability with each business model in this area. Increasingly, companies
are using several exchanges from a variety of business models to meet their
needs. It's entirely common, for example, to find one of the Global 2,500 having
relationships with several consortia exchanges, in addition to building their
own private trading exchange strategy. It's clear that exchanges are here to
stay. The lessons learned from public exchanges in particular can assist you
in selecting which consortia exchanges to participate in, and help you decide
which companies make the most sense to partner with when you create your own
private trading exchange.

Why Public Exchanges Didn't Meet Expectations

There are several reasons why the much-heralded public exchanges have not accumulated
customers and been the catalysts of business that everyone expected. The following
factors explain why public exchanges have not been able to attain greater buy-in
from prospective participants:

Processes Defined Weren't in Touch with Target Customers

Prior to the April, 2000 market correction, any venture capitalist would tell
you that a business plan based on the progression of disintermediation in a
given industry, in conjunction with a large marketing spend, would have the
potential of attracting industry leaders. This was because the focus was squarely
on making sure that one's own company didn't miss out on the rush to the Web.
Yet, in retrospect, exchanges, including Chemdex,
were in effect telling the Global 2,500 that the exchanges had a better idea
of how to run their online businesses than they did. The result was a huge infusion
of cash—to Ventro, for
example. After digging a little deeper into the processes defined, however,
it was clear that although the initial concept of a public exchange made sense,
the lack of replication and value-add back to the companies already in these
businesses was noticeable.

Clarity of Business Model

Just when do the metrics of traffic and visits turn into a revenue stream?
For several of the public exchanges, these two metrics never met, mainly due
to a lack of focus on profitability in the business models. It's true that advertising
models from Yahoo! and others
did generate initial returns, the sustainability of a business model based purely
on visits that do not entice the occasional visitor to purchase did not deliver
the levels of revenue necessary to attain growth. The alluring aspect of the
private trading exchange model is the focus on profitability and more precise
measures of velocity of transactions and inventory turns.

Where's the Margin?

Public and consortia-based exchanges have an indirect effect on gross margin
and velocity in a supply chain because these types of exchanges oftenact
as information and even transaction aggregators. Yet the private trading exchanges
have the potential of making an even greater impact on financial and supply
chain metrics because they can be tailored to the specific needs of the organization(s)
involved. The final metric that matters for implementing a private trading exchange
is margin.

That Big S Word: Scalability

The fact that many of the public trading exchanges didn't scale well for companies
as they grew both in performance and process also made them more susceptible
to shorter product life cycles. The need forcreating a platform that
can scale quickly as a company grows and the focus on greater control on the
responsiveness of how transactions are completed have made private trading exchanges
a more attractive technology.

A Vertical Market Focus Didn't Guarantee Success

Although there are many different variations of vertical market business models,
the mere fact that an exchange has a vertical focus does not ensure success.
VerticalNet and Chemdex
are both examples of companies that have strong vertical market orientations,
yet have not been able to get sufficient traction in their respective markets
because these exchanges tried to change the existing processes in industries.
Clearly, developing exchanges that can increase the velocities of transactions
are the ones that are growing today. The key point of private trading exchanges
(PTX) is that the velocities of transactions can be much more easily accomplished
when an exchange is developed specifically to accomplish the goals of an enterprise.
The consortia and public trading exchanges do provide for companies to connect
with each other. The private trading exchanges being used by Proctor
& Gamble, Dell, and
others are all managed to financial- and customer-responsiveness metrics.